“Our New Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”Benjamin Franklin
Here in the States there is nothing more certain than paying your tax bill. For those of us that own homes, this includes our property taxes. If you live in a state like New Jersey or California, this can be a hefty bill every year. The other downside of property taxes, is that they seem like the rise every year no matter what the economy is doing. Today we are going to take a look at how we can have the state pay your property tax bill.
How to Help Your State and Get Paid
Luckily for us we have a fantastic alternative to paying our property taxes with our normal earned income. This is where we enter the world of municipal bonds. Municipal bonds are a way for states to raise capital for larger projects. To do so, they issue bonds with varying interest rates and terms. The benefit when you invest in these bonds is that municipal bond interest is tax-exempt federally and for residents of the issuing state. It is important to note that any capital gains will still be taxable.
The benefit of having tax-exempt income grows as your marginally tax bracket grows as well. You can use the below chart for a quick comparison.
|Taxable vs. Tax-free yield|
As you can see, at the top marginal tax bracket the tax-exempt status enhances your returns by over 3%! This really helps when it comes to evaluating the viability of municipal bonds in our portfolio.
Making the State Pay Your Property Taxes
I am going to give you two examples of how we can have the state pay your property taxes.
For the first example, I am going to use my situation. I currently pay $6,600 annually in property taxes. If we look at MANJX (a mutual fund that holds New Jersey Municipal Bonds) their annual yield is 3.31%. If we divided $6,600 by 3.31% then we get $199,395.77. So if we hold this amount in the MANJX funds our annual property taxes will be paid for by the state.
We also get to dip a third time on the tax advantage of setting this way up. As of this writing, property taxes are deductible up $10,000 per year. This allows us to deduct the $6,600 from our taxable income and reduce our tax bill even further.
Now $199,395.77 is a lot of money just to pay property taxes on one property. I also live in New Jersey which has one of the highest property taxes in the entire country. Let’s look at another state for feasibility.
North Carolina has much lower property taxes than New Jersey. This house is very similar to the one I own in New Jersey. Their annual property taxes are only $2,343. The fund FXNCX currently has a yield of 2.55%. Using the same formula as before, dividing $2,343 by 2.55% we need $91,882.35 to pay the annual property taxes on this property. Less than half the cost with an even lower yield.
Why You Shouldn’t Use This Strategy
Now the municipal bond strategy is a great low risk strategy to eliminate your property tax bill. But this isn’t the only strategy that allows you to replace your bills with stocks.
If you are more risk tolerant, I suggest a more equity heavy approach so you can take advantage of your risk adjusted return. You aren’t going to be seeing 10%+ returns in a municipal bond portfolio. However, you do give up some of the tax advantages in other strategies and may not have the same dependable returns that you were counting on.
The other downside of having the state pay your property taxes are if you move. Municipal bonds are always going to be federally tax exempt, but you only get the state exemption for the state that you reside in. So if you hold New Jersey municipal bonds but move to North Carolina, you won’t have the same state exemptions. This is something to keep in mind as you build your forever portfolio.
Also you should not be using this strategy if you don’t own any property that you have to pay property taxes on. It kind of defeats the purpose of the strategy and your money can be better utilized elsewhere for other purposes.
How To Have The State Pay Your Property Taxes
- Identify the amount of your property taxes
- Find a municipal bond fund for the state you reside in
- Divide your property taxes by the funds annual yield
- Deposit the appropriate amount in the municipal bond fund
Now you are eliminating one more, often hefty, annual bill. Which means less funds you need to worry about for retirement when we consider the Trinity Study. The less funds that we need for retirement, the less time we need to save money and continue working. Which means this is a great strategy to accelerate your timeline to financial independence as well.
Do you use municipal bonds in your portfolio? Are they just to hedge risk or do you have a specific purpose in mind? Let me know in the comments below!